European Smaller Companies Trust PLC

7 The European Smaller Companies Trust PLC Annual Report 2024 JHI9228/2024The European Smaller Companies Trust PLC – Annual Report 2024 The European Smaller Companies Trust PLC Registered as an investment company in England and Wales Registration Number 2520734 Registered office: 201 Bishopsgate, London EC2M 3AE SEDOL/ISIN number: Ordinary Shares: BMCF868/GB00BMCF8689 London Stock Exchange (TIDM) Code: ESCT Global Intermediary Identification Number (GIIN): JX9KYH.99999.SL.826 Legal Entity Identifier (LEI): 213800N1B1HCQG2W4V90 Telephone: 020 7818 1818 Email: [email protected] www.europeansmallercompaniestrust.com JHI9228/2024Typeset by 2112 Communications, London. Printed by Paragon, London. This report is printed on Revive silk 100% recycled, contains 100% recycled waste and ismanufactured at a mill certified with ISO 14001 environmental management standard. The pulp used in this product is bleached using an Elemental Chlorine Free process (ECF). The European Smaller Companies Trust PLC Annual Report 2024 Strategic Report Performance highlights 1 Investment proposition 2 Chairman’s statement 4 Fund Manager’s report 6 Portfolio information 10 Historical information 11 Business model 12 Managing risks 16 Responsible investment 18 Key Performance Indicators 22 Governance Board of Directors 25 Corporate Governance Report 27 Audit Committee Report 34 Management Engagement Committee Report 36 Nomination and Remuneration Committee Report 37 Directors’ Remuneration Report 38 Directors’ Report 41 Statement of Directors’ Responsibilities 43 Financial Statements Independent auditor’s report 45 Financial statements 53 Notes 57 Additional information Investment portfolio 75 Alternative performance measures 78 Glossary 80 General shareholder information 81 Service providers 82 Our purpose is to deliver a long-term sustainable return to shareholders from investing in smaller and medium sized European companies. Front cover: Granulated materials being supplied to a fl uid production process. NORMA Group Percentage of portfolio: 0.6% Geographical area: Germany Designer and manufacturer of engineered joining technology such as couplings, clamps and connectors. Performance highlights at 30 June NAV per share at year end 1, 4 2024 2023 201.01p 184.26p Dividend for year 2 2024 2023 4.80p 4.70p Ongoing charge excluding the performance fee 3, 4 2024 2023 0.67% 0.65% Share price at year end 2024 2023 178.40p 154.00p Net assets 2024 2023 £799m £739m Ongoing charge including performance fee 3, 4 2024 2023 0.75% 1.67% Dividends paid 0 1 2 3 4 5 Pence Dividend 2020 2021 2023 20242022201920182015 2016 2017 2.75 3.13 4.70 4.80 4.35 2.75 1.19 1.81 1.44 2.38 Total return performance for the 10 years to 30 June 2024 (rebased to 100) 4, 5 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 20 Jun 21 Jun 24 Jun 23 Jun 22 % 50 100 150 200 250 300 350 Share price Investment Association European Smaller Companies NAV AIC sector 6 Benchmark 7 EAA Fund Europe Small-Cap Equity (Morningstar category) 1 Net asset value per ordinary share 2 Includes the interim dividend and final dividend recommended to shareholders for approval 3 Calculated using the methodology prescribed by the Association of Investment Companies (‘AIC’) 4 The NAV per share, NAV total return, share price total return and ongoing charge are regarded as Alternative Performance Measures. More information on these can be found on pages 78 and 79 5 NAV total return performance per ordinary share assumes all income is reinvested 6 Average NAV total return for the AIC European Smaller Companies sector 7 Euromoney Smaller European Companies (ex UK) Index up to 30 June 2022, thereafter the MSCI Europe ex UK Small Cap Index Sources: Morningstar Direct, Janus Henderson Investors A glossary of terms can be found on page 80 The European Smaller Companies Trust PLC Annual Report 2024 1 Why invest in small and medium sized Europeancompanies? Source:Morningstar Direct 1 Based on 2018 prices Small caps have a long term record of outperforming large caps (index total return %, rebased to 100) Jun 01 Jun 02 Jun 03 Jun 04 Jun 05 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Jun 24 Jun 23 Jun 22 Jun 21 Jun 20 US Equities (S&P 500) European Small Caps (MSCI Europe ex UK Small Cap Index) European Large Caps (MSCI Europe ex UK Index) % 0 100 200 300 400 500 600 700 800 European small caps have outperformed large caps in 14 of the last 24 years (calendar year total returns) % 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 YTD MSCI Europe Small Cap -18.6 -25.9 23.5 10.8 22.2 15.8 14.4 -24.2 20.5 6.2 -8.8 14.1 22.8 -0.2 1.9 20.1 14.3 -8.3 18.8 0.7 18.9 -1.2 14.2 8.0 MSCI Europe Large Cap -7.6 -20.6 45.9 24.2 33.5 27.8 1.1 -36.3 47.3 25.7 -19.2 23.8 37.4 -0.3 17.7 17.3 24.3 -14.6 24.6 10.9 16.6 -17.7 10.7 3.2 Relative -11.0 -5.4 22.3 13.4 11.3 12.1 13.2 -12.1 26.7 19.5 -10.4 9.7 14.6 -0.1 15.8 2.8 10.0 -6.3 5.8 10.2 2.4 -16.4 3.4 4.8 The smaller companies sector is an imperfect market which is ideal for active fund management. It offers exposure to high growth niches such as: Small cap has a larger universe to choose from, stocks are less well covered by analysts meaning a greater opportunity to find mispriced securities e-commerce Circular economy € Warehouse automation Fintech € Europe ex UK NUMBER OF STOCKS AVERAGE NUMBER OF SELL SIDE ANALYST COVERAGE market cap >£5b market cap £100m to £5b 1,872 439 18 5 The spending will be focused on digital and green infrastructure. This marks the first-ever mutually financed stimulus programme and lays the framework for a period of greater political stability on the Continent. The EU has announced: ‘Next Generation EU’; amounting to €750bn 1 €390b grants + €360b loans Going forward growth will be aided by recovery/green fund The European Smaller Companies Trust PLC Annual Report 2024 2 Note: Percentage holdings are estimated at 30 June 2024 Early Cycle – show a recent history or forecast of improving return on invested capital accompanied by strong sales growth (in excess of 10% forecast typically) Quality Growth – exhibits consistently above cost of capital ROIC and shows above GDP level growth on an organic or mergers & acquisitions basis Mature – consistently earns ROIC in and around the cost of capital Turnarounds – earns ROIC below cost of capital, or significantly below comparable industry peers, with forecast expectations of improvements over time Why invest in this Company? Balanced portfolio seeking attractive valuations and high growth opportunities European Assets The European Smaller Companies Trust Implications for OUR INVESTORS Alpha-driven and not wedded to a particular style Deep-Value Micro Giant High-Growth JPMorgan European Discovery Montanaro European Smaller Source: Morningstar at 30 June 2024 TRUE SMALL CAP VALUATION- AWARE APPROACH INVESTING ACROSS THE COMPANY LIFE CYCLE Lower average market cap than peers – circa 40% of the portfolio in stocks with a free float <€1b Willing to look at neglected areas of the market – mature and turnaround situations as well as quality growth opportunities We buy companies where the market misperceives the true fundamental value 6% 45% 33% 27% Return on Invested Capital (‘ROIC’) 1 4 3 2 Turnaround Mature Quality Growth Early Cycle Quality Growth Mature Turnaround Early Cycle We take exposure across the company life cycle Company life cycle The European Smaller Companies Trust PLC Annual Report 2024 3 Chairman’s statement “ Europe is fortunate to be the provider of the ‘picks and shovels’ of the big structural growth trends… ” The Chairman of the Board, Christopher Casey reports on the year to 30 June 2024 S.O.I.T.E.C., 0.9% of the portfolio Manufacturer of substrates used in the production of semiconductors 4 It has been encouraging to see interest in the European smaller company arena return over the course of the year and the Company to have participated profitably from this trend. Inflation has been tamed though interest rates have yet to meaningfully decline. Tragically the conflict in Ukraine festers on, although the energy shock has largely been contained. Aglobal recession has not manifested and a soft landing looks increasingly plausible. The Purchasing Managers’ Index has yet to see a rebound, but there is growing optimism that the market suffering is close to being over. Smaller companies are well positioned to benefit from things getting better and the fund management team is well placed to take advantage of the situation. Performance The Company’s portfolio produced a solid return over the year ended 30 June 2024, with an NAV total return of 12.0%, ahead of the benchmark by 1.9%. The share price total return was even more impressive at 19.5%, reflecting the growing interest in Europe and its smaller companies. This continues the Company’s long term NAV and share price total return track record, as the chart on page 1 clearly demonstrates. Over a five-year period, the NAV total return has been 73.3% versus the benchmark of 37.2%, with the share price total return being 82.8% compared to the AIC European Smaller Companies sector of 40.1%. Discount management The average discount for the period has been 13.5%. Over the course of the financial year and up to the date of this report, we repurchased a total of 6.4m shares in the market at an average price of 167.68p. Doing so has been accretive to the NAV and was one of several factors contributing to the narrowing of the discount. The Board continually monitors the discount to NAV at which the Company’s shares trade and utilises its ability to repurchase its own shares in the market with a view to reducing volatility and maintaining liquidity. We review the discount taking account of the position of our immediate competitors in the AIC European Smaller Companies sector, the investment trust sector as a whole and conditions in the wider market, particularly those in Europe, which are likely to have an impact on how the Company is perceived. Dividend The Board is recommending a final dividend of 3.35p per ordinary share to shareholders for approval at the forthcoming annual general meeting. If approved, the dividend will be paid to shareholders on the register on 1 November 2024. Along with an interim dividend of 1.45p which was paid on 3May 2024, this brings the total dividend to 4.80p, an increase of 2.1% on the total dividend paid last year. The Company has benefitted from a handful of stocks that have had very high income distributing capacity in recent years, but as the fund management team begins to anticipate an economic expansion, there may be more of a pursuit of capital growth from among the many exciting investment opportunities in our market. Succession planning The forthcoming annual general meeting will be my last as Chairman. We were pleased to announce the appointment ofJames Williams as the chairman designate in October last year. He brings with him over 30 years’ international business experience, including 20 years in the investment banking industry, and a strong suite of leadership skills. I believe I will be leaving the Company in good hands. We have further agreed a timeline for the retirement of Simona Heidempergher and have engaged recruitment consultants to help in the search for a suitable replacement. Your new Chairman will keep you updated in this respect. Annual General Meeting The 34th Annual General Meeting will be held at 11.00 am on 25 November 2024 at 201 Bishopsgate, London, EC2M 3AE. The event provides the opportunity for shareholders to meet with, and hold to account, the directors and fund management team. The Fund Manager will give his usual presentation on the year under review and the outlook for the year ahead. We therefore encourage all shareholders to attend if they can and to vote their shares, either at the meeting or via proxy beforehand. If you are unable to attend in person, you will be able to watchthe meeting live via the internet by visiting www.janushenderson.com/esct-agm. Outlook I stated last year that I considered inflation to be close to settling near target. This has proved to be true and we have begun to see interest rates reduce to more appropriate levels across the globe, but most importantly in the United States. This, combined with reserve rate cuts and financial stimulus in China, is a welcome relief for the global economy and for European smaller companies. It is a shame that political uncertainty has poked its head up in Europe again with the French election being unhelpful for growth and elections in the US have scope to create further doubt for our markets. Notwithstanding this, the very low valuations in Europe, the falling cost of capital and the improving economic optimism should outweigh the noise of politics. Europe is fortunate to be the provider of the ‘picks and shovels’ of the big structural growth trends such as Artificial Intelligence, the ‘Green Transition’ and industrial automation. Itis an exciting time for the European smaller company space. Christopher Casey Chairman 9 October 2024 Chairman’s statement The European Smaller Companies Trust PLC Annual Report 2024 5 Fund Manager’s Report Ollie Beckett Fund Manager Julia Scheufler Deputy Fund Manager Rory Stokes Deputy Fund Manager NCAB Group, 0.6% of the portfolio Manufacturer of printed circuit boards 6 Fund Manager’s report Introduction The year to 30 June 2024 was a decent year for the Company, with an NAV total return of 12.0% outperforming the benchmark which delivered a return of 10.1%. Despite the lacklustre economy, investors put fresh eyes on the European smaller companies universe which helped the start of the recovery in valuation multiples for the space. The year was characterised by soft markets in a tepid European economy. However, hopes of an economic pick-up began to manifest towards the end of 2023. We encountered a ‘growth scare’ towards the end of the financial year as fears that the European Central Bank and the Federal Reserve had been too slow to cut interest rates were exacerbated by snap elections called in France and the UK, which temporarily disrupted economic activity. A recession has been long awaited following the energy and supply chain shocks that hit the global economy in 2022. We have, however, been of the view that the global economy would have a soft landing, but that inflation and consequently interest rates would remain higher than prior to the pandemic. So far that has broadly come to pass, but we do think monetary policy is too tight inthe West and that central banks need to loosen policy now that inflation has been largely tamed. Another phenomena of the markets has been an extreme concentration in a few very large companies. In the US this was a group of companies referred to as ‘The Magnificent Seven’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla). In Europe no exciting collective noun was settled on, but names such as semiconductor equipment titan ASML, GLP-1 producer Novo Nordisk and luxury good behemoth LVMH have dominated stock market performance in recent years. However, we began to see the broadening of the market take place over the year and smaller companies began to outperform larger companies for the first time since 2021. This was helpful for your Company that has a focus on investing in genuinely smaller companies. Perception and reality do not always align. Much of what we do as a team is to look for companies that have a fundamental reality that is better than its perception in the stock market and to consider ways that this can change. In some respects, this is true of the European smaller company market in general. One country that firmly has a perception problem is Germany. An economic model dependent upon cheap Russian energy and Chinese demand meeting the impending demise of the internal combustion engine automobile appears to have some substantial problems. So it is gratifying to have found so many German businesses that have been able to prove the naysayers wrong and show the reality that there is some incredible innovation and great businesses in the country. The outperformance over the twelve months to 30 June 2024 was primarily driven by stock selection, with a handful of winners driving performance, many of them being German. German listed semiconductor equipment manufacturer SUESS Microtec was a substantial contributor in the period, as demand for their Temporary Bonder machines, used in the manufacturing of Artificial Intelligence (‘AI’) chips, increased dramatically. German listed specialty chemical producer Alzchem also performed well as a result of the growth in their creatine and nitroguanidine businesses. Creatine is a chemical that supplies energy to muscles and has long been favoured by bodybuilders, but is increasingly being used to fend off conditions such as sarcopenia. Nitroguanidine is a propellant that goes in car air bags, but is also a key ingredient in NATO ammunition. Another German driver of performance was web hosting and cloud services solutions provider IONOS as a combination of a cheap valuation and strong earnings momentum drove the pricing of the shares. The portfolio We remain consistent in our strategy of investing across thecorporate lifecycle with a balance of early-stage growth stocks, high return on capital growth compounders at sensible prices, undervalued cash generative mature companies and self-help turnaround stocks. The price we pay for shares in a company is a critical component of what we doand must be justified by the cash generation potential of abusiness. We are not a ‘value fund’ but we are intensely valuation aware. Our intention is that the performance of the portfolio is driven by stock selection rather than macro- economic factors and one of our key contentions is that company management matters. It is always gratifying to see underperforming companies get their act together and one such name for usthis year has been Fugro, a Dutch listed collector and interpreter of geological data. The company has evolved from servicing the oil and gas industry to being a key part of the green energy transition, helping developers understand where best to locate offshore wind turbines. Thecompany had been a stock market darling in the 2000s, but with the collapse in oil and gas capital expenditure from 2014 onwards had been struggling, earning a paltry return on capital employed. Weinvested in the company during the pandemic when the company was loss making and needed to raise capital. Since then, management has done a terrific job of improving returns by focusing the business on renewables and driving better margins and asset efficiency. We think the return on capital has a way to go yet, but the shares have begun to catch the markets’ attention again and the holding was a strong contributor to performance this year. Performance attribution The Company benefitted from our investment in Dutch listed wealth manager Van Lanschot Kempen, which continued to attract strong fund inflows in the low countries. Swedish listed digital investment platform Nordnet saw an increase in business momentum as animal spirits revived in their market. One of the joys of managing a European smaller companies portfolio is that the investable universe is so fabulously heterogeneous that we are able to find companies that are benefitting from almost any exciting trend in the world. The European Smaller Companies Trust PLC Annual Report 2024 7 Fund Manager’s report (continued) Onesuch trend that has obsessed the stock market this year has been AI and the growth in data centres. Swedish listed Munters, whose products help manage the climate inside data centres, has seen a terrific boost to its business as a result of this and it has been a worthwhile investment for yourCompany. Another area of exciting growth is in the world of podcasts, amedia broadcast over the internet and which is used for exploring any topic that interests a listener. Swedish listed Acast is the European leader in hosting, distributing and monetising podcasts. The stock has performed very well this year as the company approached profitability and continued to grow strongly in a weak advertising market. Corporate activity returned to the European smaller companies space with bid approaches for Swedish online gambling company, Kindred and Swedish legal services expert Karnov. Whilst we didn’t think we captured all the value possible from Kindred, the offer was reasonable and we decided to take some profit. However, we, and many other public market investors, deemed the bid for Karnov to be too far from its fundamental valuation and rejected it. We are firmly of the belief that as interest rates begin to fall the very cheap valuations on display in the European smaller companies market will see a notable increase in this type of activity. Detractors from performance have been largely driven by our misjudging where several companies were in their economic cycle, but also (unusually) by a handful of stocks that we missed the opportunity to invest in. The sins of omission mainly comprised our failure to spot Danish listed GLP-1 anti-obesity drug develop Zealand Pharma and Spanish bank Banco de Sabadell, which weighed on the Company’s relative performance. In contrast, our investment in Dutch listed specialty metal producer AMG Critical Materials, which has suffered due to the abject collapse in the lithium price over the course of the year, detracted from performance. Lithium prices have been poor for a combination of reasons, but the principal one has been the weakness in the automotive market for electric vehicles (‘EVs’) due to regulatory uncertainty on the green transition as well as interest rates. We have had too much exposure to the automotive market and a number of burdens for the Company such as German listed producer of electric boot openers Stabilus, Italian listed producer of stators and rotors for EVs Eurogroup Laminations and French listed producer of silicon carbide used in the rapid charging of EVs Mersen have not helped performance. It has been a frustration to relearn some fundamental investment lessons through the medium of making mistakes, but disappointingly we have been through that process this year. One such lesson is not to bet on a binary technology outcome and German listed Manz whose battery technology had looked so promising for the EV transition has failed to turn the science into cash flow. This lesson was rammed home by our investment in Swiss listed AMS-Osram whose exciting microLED technology was abandoned by their large American tech company customer, who has historic form in rough treatment of its supply chain. We intend to do a better job of applying such lessons in the future without the impact on our investors’ capital. Geographical and sector distribution Stock selection rather than geographical and sector exposure is the fundamental core of our investment process, though we are careful to monitor how we are positioned as part of our risk management approach. We have never viewed the benchmark as an input to our process and we are content to diverge widely from it. Our valuation discipline typically leads us away from the more expensive markets and sectors in Europe and as a result we find ourselves underweight to Switzerland and Sweden. Conversely, we are overweight to Germany and the Netherlands where multiples are lower. Similarly, we are underweight to the sectors where we struggle to find value such as health care, utilities and real estate. We are overweight to the industrials sector, as valuations are very cheap and have scope for strong performance as the economy begins to grow again, as well asbeing overweight to technology where we continue to see strong structural growth trends. Other purchases Your Company typically invests in Europe outside of the UK, however, we have a degree of flexibility around this and with the Board’s approval we took a position in UK listed online trading provider IG Group as we saw such potential in the company’s cheap valuation and phenomenal cash generation capacity coupled with a strong capital return discipline. Whilst the shares have been very strong, you shouldn’t expect us toinvest beyond the broad remit with any great frequency. We have added a handful of defence exposed names to the portfolio over the course of the year. German listed producer of gearboxes and transmissions for military vehicles Renk, Dutch listed producer of night vision goggles Theon International and French listed Exosens, the producer of the tubes that go into those goggles, all made it into the portfolio, benefitting from the need for European rearmament. All three investments came from new listings on the stock market known as Initial Public Offerings (‘IPOs’). The IPO market has been very quiet since the end of 2021 due to a combination of weak markets and the bad taste left in the mouth from the terrible vintage of IPOs that came through in that year. It is pleasing to report that all three investments listed above plus our investment in Greek bank Optima, havecontributed positively to performance. Another feature of the hot markets of 2020 and 2021 was thecreation of a number of Special Purpose Acquisition Companies (‘SPACs’). A SPAC is a company that is listed on the stock market with the sole purpose of reversing a real company into a listing. You will never encounter us investing directly in a SPAC and it will not be often that you catch us The European Smaller Companies Trust PLC Annual Report 2024 8 investing in, the inelegantly titled, de-SPACed companies that have had a business reversed into them, so it is notable that we have taken a position in Swiss listed R&S Group which manufactures transformers, the equipment that alters alternating current and direct current. A significant investment in the electricity grid of Europe is required and R&S Group has an exciting position in this development. Other disposals We exited our position in Italian listed SAES Getters having profited handsomely from the disposal of its medical devices business. We also took profits by selling our shares in Italian listed producer of commercial vehicles Iveco. We saw an increase in mergers and acquisitions activity and the Company benefitted from bids for French listed financial adviser Rotheschild & Co. and Swedish listed online gambling company Kindred. As interest rates reduce and financial conditions normalise, we would not be surprised to see more frequent mergers and acquisitions activity, an arena that usually benefits smaller companies. Currency The Company is denominated in sterling, while investing in largely euro-denominated assets. We do not hedge this currency exposure. Outlook We stated last year that we feared central banks had raised interest rates too high and we were anxious that, having been too slow to raise them, they would be too slow to cut them. Although, the European smaller company universe has seen an improvement in interest and performance, and remains veryattractively valued, it typically doesn’t fare well in a recessionary environment. Monetary policy becoming less restrictive in recent weeks, albeit not yet supportive, is a respectable positive indicator for the global economy. We continue to believe that with sensibly applied monetary policy, the economy can experience a ‘soft landing’ and thereafter grow. European smaller companies due to its gearing to global growth will be a profitable place to invest in such a scenario. Beyond the attraction of valuation, our investment universe is rich with opportunity. There are plentiful companies with exciting technologies, structural growth drivers and strong market positions. By applying our balanced investment strategy and remaining disciplined on our ‘valuation aware’ approach, we are confident that we can continue to find strong investment returns for our shareholders. Ollie Beckett, Rory Stokes and Julia Scheufler 9 October 2024 Fund Manager’s report (continued) The European Smaller Companies Trust PLC Annual Report 2024 9 Portfolio Information Ten largest investments at 30 June 2024 Ranking 2024 Ranking 2023 Company Principal activities Geographical area Valuation 2024 £’000 Percentage of portfolio 1 1 Van Lanschot Kempen Specialist independent wealth manager that provides private banking, asset management and merchant banking to wealthy individuals and institutions. www.vanlanschot.nl Netherlands 27,129 3.1 2 2 TKH Technology company specialising in the development and delivery of systems and networks for the provision of information, telecommunication, electrotechnical engineering and industrial production. www.tkhgroup.com Netherlands 26,141 3.0 3 62 SUESS MicroTec Leading supplier of equipment and process solutions for the semiconductor industry. www.suss.com Germany 17,488 2.0 4 8 KSB Manufacturer of pumps and valves. www.ksb.com Germany 17,275 1.9 5 – IG Group Global fintech company that delivers online trading platforms. www.ig.com United Kingdom 14,791 1.7 6 35 Stroeer Provider of out-of-home advertising, onlline advertising, billboards and street furniture. www.stroeer.de Germany 14,683 1.7 7 17 Fugro Provider of geotechnical, survey, subsea and geosciences services, as well as essential earth and related construction testing, inspection and monitoring data and consulting services. www.fugro.com Netherlands 14,269 1.6 8 4 DFDS Northern Europe’s largest integrated shipping and logistics company. www.dfds.com Denmark 13,839 1.6 9 10 Criteo Online advertising company. www.criteo.com France 13,660 1.5 10 6 u-blox Developer of embedded positioning and wireless communication components and software. www.u-blox.com Switzerland 12,799 1.4 172,074 19.5 Geographic exposure 2024 % 2023 % Germany 20.2 17.4 France 12.7 14.6 Netherlands 11.9 11.9 Sweden 10.9 10.0 Switzerland 8.2 8.1 Italy 5.3 10.3 Belgium 5.0 4.2 Spain 4.9 5.4 Denmark 4.0 2.8 Greece 3.1 3.2 2024 % 2023 % Norway 2.9 2.3 Portugal 2.4 1.3 Ireland 2.2 2.5 Finland 1.7 3.0 United Kingdom 1.7 – Austria 1.6 2.0 Cyprus 0.8 – Faroe Islands 0.5 – Malta – 1.0 2 0 2 3 2 0 2 4 Sector exposure 2024 % 2023 % 2 0 2 3 2 0 2 4 Industrials 36.3 38.6 Consumer Discretionary 17.1 20.9 Financials 13.6 13.0 Technology 13.3 11.6 Basic Materials 5.0 3.2 Real Estate 3.7 2.3 Consumer Staples 3.4 2.0 Health Care 3.1 3.1 Energy 2.0 1.7 Utilities 2.0 3.1 Telecommunications 0.5 0.5 The European Smaller Companies Trust PLC Annual Report 2024 10 Sector exposure 2024 % 2023 % 2 0 2 3 2 0 2 4 Industrials 36.3 38.6 Consumer Discretionary 17.1 20.9 Financials 13.6 13.0 Technology 13.3 11.6 Basic Materials 5.0 3.2 Real Estate 3.7 2.3 Consumer Staples 3.4 2.0 Health Care 3.1 3.1 Energy 2.0 1.7 Utilities 2.0 3.1 Telecommunications 0.5 0.5 1 Net asset value total return per ordinary share 2 Euromoney Smaller European Companies (ex UK) Index up to 30 June 2022, thereafter the MSCI Europe ex UK Small Cap Index 3 The sector is the AIC European Smaller Companies sector 4 Share price total return using closing price 5 The NAV per share, NAV total return, share price total return, discount and ongoing charge are regarded as Alternative Performance Measures. More information on these can be found on pages 78 and 79 6 Average share price for the AIC European Smaller Companies sector 7 Excludes the performance fee where payable 8 Figures for 2015 to 2021 are restated to take account of the 8:1 share split completed on 13 December 2021 Sources:Morningstar Direct, Janus Henderson Investors Total return performance to 30 June 2024 (including dividends reinvested and excluding transaction costs) 1 year % 3 years % 5 years % 10 years % NAV 1, 5 12.0 2.9 73.3 200.4 Benchmark 2 10.1 0.2 37.2 128.0 Average sector NAV 3 7.9 -7.5 40.3 155.8 Share price 4, 5 19.5 4.5 82.8 211.7 Average sector share price 3, 6 11.1 -8.7 40.1 153.7 Total return performance compared to the benchmark (assumes the investment of £100 and reinvestment of all dividends) 50 100 150 200 250 300 350 2017 2018201620152014 2023 2024 2022 2021 2020 2019 Share Price 4, 5 NAV 1, 5 Benchmark 2 £ Financial information At 30June Net assets £’000 NAV per ordinary share 8 p Closing price per ordinary share 8 p Discount 5 % Profit/(loss) for year £’000 Revenue return 8 p Capital return 8 p Tota l return 8 p Tota l dividend 8 p Ongoing charge 5, 7 (AIC formula) % 2015 337,645 84.45 78.00 7.6 16,565 1.42 2.72 4.14 1.19 0.78 2016 377,683 94.46 77.50 18.0 44,782 1.69 9.51 11.20 1.44 0.79 2017 569,459 143.19 133.88 6.5 199,540 2.14 47.96 50.10 1.81 0.75 2018 574,591 143.34 127.50 11.0 9,936 2.76 (0.27) 2.49 2.38 0.71 2019 521,023 129.98 111.50 14.2 (42,795) 3.01 (13.69) (10.68) 2.75 0.72 2020 523,374 130.56 105.50 19.2 13,525 1.49 1.88 3.37 2.76 0.73 2021 840,667 209.71 185.63 11.5 328,517 2.59 79.36 81.95 3.13 0.71 2022 652,464 162.76 140.00 14.0 (174,712) 5.16 (48.75) (43.59) 4.35 0.65 2023 738,642 184.26 154.00 16.4 104,381 5.22 20.82 26.04 4.70 0.65 2024 798,594 201.01 178.40 11.2 84,898 5.41 15.81 21.22 4.80 0.67 Historical Information 11 The European Smaller Companies Trust PLC Annual Report 2024 Business model Purpose Our purpose is to deliver a long-term sustainable return to shareholders from investing in smaller and medium sized European companies. Strategy Our strategy is to offer investors a cost effective investment proposition which provides access to a professionally and actively managed portfolio of investments. The Company is an investment trust which is a pooled invest vehicle, allowing exposure to a diversified range of assets through a single investment, thus spreading the investment risk. All services are delivered by reputable third-party service providers whose performance is overseen by a Board of Directors (the ‘Board’). The Board is comprised entirely of non-executive directors accountable to shareholders, who can remove a director from office where they deem it tobe in the interests of the Company. The non-executive directors are independent of the investment manager. The significant advantages of our business model are its closed-end nature, which enables the Fund Manager to remain fully invested, and the ability to use leverage to increase returns for shareholders. Values and culture We aim to be viewed by our shareholders as a sound long- term investment. Alongside delivering attractive returns, we believe our shareholders would expect us to act professionally and with integrity, and to treat their investment with the same care we would our own. Accordingly, we bring these values to our deliberations as a Board and seek to build long-term relationships with like-minded and reputable service providers. In particular, we apply this approach to our investment manager as we regard them as our primary partner in fulfilling our purpose. Promoting the Company’s success We seek to create long-term sustainable returns by following four simple steps: Buy the right assets: The fund management team maintain adiversified portfolio with strong valuation disciplines. Theportfolio comprises investee companies from across thecorporate lifecycle, with a mix of early stage growth businesses, sensibly priced quality growth stocks, companies with mature revenue streams and self-help turnaround stories. Using the right team: The Company outsources its operations to third-party service providers. The Board engages high- calibre, reputable service providers with established track records to deliver the day-to-day operations. Their level of service is monitored on an ongoing basis and their continued appointment formally evaluated at least once a year. With the right approach: The Company is a closed-end investment vehicle, approved by HMRC as an investment trust under theCorporation Tax Act 2010. By adopting a closed- end structure, we allow the fund management team to take along-term view when making investments, they can remain fully invested as there are no redemptions to meet and they have the ability to use leverage to increase returns for shareholders. This approach provides a cost-effective mechanism for delivering operations whilst allowing the Company to take advantage of the capital gains treatment afforded to approved investment trusts. Investment objective The Company seeks capital growth by investing in smaller and medium sized companies which are quoted, domiciled, listed or have operations in Europe (ex UK). Investment policy The following investment ranges apply: Equities: 80% – 100% Fixed Income and Cash: 0% – 20% Smaller and medium sized companies are defined as those whose market capitalisation is equal to or below the largest member of the MSCI Europe ex UK Small Cap Index 1 at the time of investing. Investments may include shares, securities and related financial instruments, including derivatives. Unquoted investments are permitted with prior Board approval. The Company maintains a diversified portfolio. The Company will not invest more than 7% of its total assets, calculated as at the time of investment, in any one holding. The Company can, but normally does not, invest up to 15% of its gross assets in investment companies (including listed investment trusts). The Company will not invest more than 10% of its gross assets in companies that themselves may invest more than 15% of their gross assets in UK listed investment companies. Derivatives The Company may use financial instruments known asderivatives for the purpose of efficient portfolio management while maintaining a level of risk consistent with the risk profile of the Company. Gearing Net gearing (defined as all borrowings less cash balances andinvestments in cash funds) is limited by the Board to amaximum of 30% of net asset value at the time of investment. With appropriate Board approval, the Company may, but currently does not, hedge against currency movements. 1 Benchmark with effect from 1 July 2022 The European Smaller Companies Trust PLC Annual Report 2024 12 Business model (continued) Overseen with the right governance: The Company’s operations are overseen by a Board of Directors. The Board is accountable to the Company’s shareholders andare re- elected by them annually. The directors are independent of the investment manager and are selected based on their business experience and personal attributes in order to bring a balance of skills to the oversight of the Company’s operations and to ensure thatthe investment manager is appropriately challenged on their recommendations. Engaging with stakeholders (s.172) We, as directors, have the success of the Company foremost in our minds when making decisions. Decisions are taken with the aim of achieving our purpose and are based on information provided by a range of sources. The impact on stakeholders is assessed as part of our deliberations, although stakeholders may be affected differently. The table below sets out the primary ways in which we, as your Board, engage with the Company’s key stakeholders. Stakeholder Engagement Shareholders and potential investors Purpose: ● Keep investors updated on the Company’s performance. ● Promote the Company to new shareholders. How we engage: ● Daily NAVs and monthly factsheets are published to keep shareholders up to date with the value of theportfolio. ● Meetings with the Fund Manager, members of his team and Board members are offered to shareholders and potential shareholders to provide insight into the portfolio. ● Information on the Company and video updates from the Fund Manager are made available on the website and via social media channels with a view to keeping shareholders informed on the positioning of the portfolio. ● The half-year report and annual report are published to keep shareholders informed on the Company’s financial performance, its governance framework and any current issues. ● Shareholders are encouraged to attend the annual general meeting where they have the opportunity to meet Board members and the fund management team. ● The Fund Manager provides a presentation to shareholders and analysts following publication of the annual report with a view to providing insight on the Company’s performance. ● The investment manager and corporate broker run a programme of engagement with wealth managers and other professional investors. ● The Board makes additional spend available to promote the Company’s investment proposition to retail investors in the UK and holds an in-person annual general meeting enabling shareholders to attend and speak to directors and the fund management team. Outcome: ● Shareholders are informed and there is regular demand for the Company’s shares. Investment manager Purpose: ● Maintain a close working relationship with the investment manager as this is key to achieving the Company’s investment objective and promoting the Company to investors. How we engage: ● The fund management team are invited to each Board meeting to provide an update on the performance of the portfolio and to keep the directors in touch with their view on the markets and positioning of the portfolio. ● The investment manager provides data on the key performance indicators at each meeting enabling the directors to measure performance. ● The investment manager demonstrates compliance with the parameters of the investment mandate at each meeting and provides access to senior managers in the Operational Risk and Internal Audit teams enabling the directors to assess the effectiveness of internal controls in operation. ● The heads of the investment trusts Sales and Marketing teams are invited to provide regular presentations to the Board on how the Company is promoted to professional and retail investors. Outcome: ● The Board is confident that the Company’s assets are well managed and managed in line with the investment objective, and within the parameters established by the Board. ● The Board has a good understanding of how the Company is perceived in the market and whether theinvestment objective remains relevant in the prevailing market conditions. The European Smaller Companies Trust PLC Annual Report 2024 13 Business model (continued) Stakeholder Engagement Service providers ● Corporate broker ● Custodian ● Depositary ● Fund administrator ● Registrar Purpose: ● The Company’s day-to-day operations run smoothly. ● The directors are aware of any issues which may arise and can ensure that suitable action is taken to address them. How we engage: ● The Board receives regular reporting and presentations from its key third-party service providers throughout the year. ● Designated staff at the investment manager engage regularly with all third-party service providers through meetings and written reporting, and keep the Board updated with any areas of concern. ● The Management Engagement Committee annually reviews the level of services delivered by each service provider and the terms on which they are engaged to ensure that these remain in line with market practice. Outcome: ● The Board is confident in its selection of third-party service providers and maintains good oversight of the Company’s operations. Investee companies and the environment Purpose: ● The Board has an understanding of the Fund Manager’s approach to incorporating environmental, social and governance matters in stock selection. How we engage: ● The fund management team has regular engagement with the management teams of investee companies enabling them to assess performance and governance arrangements. ● The shares held in the Company’s portfolio are voted at general meetings and appropriate engagement undertaken with investee companies where management proposals are not supported. Outcome: ● The Company is a responsible investor. Board decision making The Board is mindful of acting in the best interests of shareholders as a whole and has regard to other stakeholders in making its decisions. The Board takes into consideration the Company’s purpose, investment objective and policy as well as the interests of the Company’s stakeholders when discussing matters and making decisions. In addition to regular, detailed discussions about the Company’s investment portfolio, strategy and performance, the following are examples of discussions held and decisions made by the Board during the financial year ended 30 June 2024. Discount control The Board kept the level of discount and presence of activist shareholders in the market under regular review. The Company’s discount, that of its immediate competitors in the AIC European Smaller Companies sector and the discount of the investment trust sector as a whole were considered at each meeting. This resulted in the repurchase of 3.6m shares during the period which saw the discount narrow from 16.4% at the start of the financial year to 11.2% at the end of it. Dividends The Board considered the revenue forecast at each meeting and, in reviewing the half-year and full-year accounts, considered what level of dividend should be distributed to shareholders. As a result of the healthy revenue position, the Board declared an interim dividend of 1.45p per share, which was paid on 3 May 2024. The Board are further recommending to shareholders that a final dividend of 3.35p per share be approved at the forthcoming annual general meeting. Retail marketing strategy With the increasing number of self-directed retail investors utilising share dealing platforms, the Board gave careful consideration to the strategy used to reach and keep these investors informed. A research driven approach and additional resource was approved with the view that the stronger promotional effort should increase awareness and understanding of the Company’s investment opportunity. The European Smaller Companies Trust PLC Annual Report 2024 14 Business model (continued) Fee arrangements The Company is an Alternative Investment Fund and has appointed Janus Henderson Fund Management UK Limited (‘JHFM’) to act as its Alternative Investment Fund Manager (‘AIFM’). JHFM delegates investment management services toJanus Henderson Investors UK Limited. Both entities are authorised and regulated by the Financial Conduct Authority (‘FCA’) and are part of the Janus Henderson group of companies. References to ‘Janus Henderson Investors’ or ‘JHI’ refer to the services provided to the Company by the investment manager’s group. The investment manager is engaged under the terms of an agreement initially agreed in 2014 and most recently updated in 2024. The agreement is terminable on six months’ notice. The fund management team is led by Ollie Beckett, who has been in place since 1 July 2011. The base management fee is 0.55% of net assets up to £800m and 0.45% thereafter. Fees are charged quarterly inarrears. The investment manager may also be eligible to receive a performance related fee. Performance is measured against, and expressed relative to, the benchmark. Witheffect from 1 July 2022, the benchmark is the MSCI Europe ex UK Small Cap Index. For the purposes of calculating the performance fee, the new benchmark is being introduced ona rolling basis. Performance has therefore been measured using the MSCI Europe ex UK Small Cap Index for the years ended 30 June 2023 and 2024 and the Euromoney Smaller European Companies (ex UK) Index for the year ended 30June2022. Performance of the Company and the benchmark is measured on a NAV total return (with gross income reinvested) basis and is measured over a rolling three-year period. In any given year in which a performance fee is payable, the rate is 15% of the positive difference between the average annual NAV total return and the average annual total return of the benchmark. The upper limit on the total fee, including the base fee and any performance fee, for any given accounting year is 2.0% of the NAV of the Company as at the last day of the relevant calculation period. A performance hurdle over the benchmark of 1.0% must be reached before any performance fee can be earned and is excluded from the performance fee itself should one be payable. Performance is measured solely on the basis of NAV total return relative to the total return of the benchmark index. No account is taken of whether the NAV grows or shrinks in absolute terms. The investment manager, and its subsidiaries, provide accounting, company secretarial, sales, marketing and general administrative services to the Company. Some of theadministrative and accounting services are carried out, onbehalf of the investment manager, by BNP Paribas. Corporate Secretary The Corporate Secretary, Janus Henderson Secretarial Services UK Limited, is a subsidiary of Janus Henderson Investors withits own reporting lines and audited internal controls. There are processes and controls in place to ensure that thereis a clear distinction between the Corporate Secretary and JHI, particularly when dealing with any conflicts or issues between the Company and JHI. Correspondence from shareholders addressed tothe Chairman or the Board received at theinvestment manager’s offices is forwarded to theChairman,or addressee, in line with the established procedures in place. This Strategic Report, set out on pages 1 to 23, has been approved by the Board. On behalf of the Board Daniel Burgess Chairman of the Audit Committee 9 October 2024 The European Smaller Companies Trust PLC Annual Report 2024 15 Principal and emerging risks Investing, by its nature, carries inherent risk. The Board, with the assistance of the investment manager, carries out a robust assessment of the principal and emerging risks and uncertainties facing the Company which could threaten the business model and future performance, solvency and liquidity of the portfolio. A matrix of these risks, along with the steps taken to mitigate them, is maintained and is kept under regular review. The mitigating measures include a schedule of investment limits and restrictions within which the Fund Manager must operate. The principal risks which have been identified and the steps we have taken to mitigate these are set out in the table below. Wedo not consider these risks to havechanged during the period. Principal risk Mitigating measures Investment strategy and objective The investment objective or policy is not appropriate in the prevailing market or sought by investors, leading to a wide discount and hostile shareholders. Investment mandate limits established by the Board are inappropriate leading to out-of-scope investments which may negatively impact shareholder value. Poor investment performance over an extended period leading to shareholders voting to wind up the Company. This may be the result of: ● external factors such as geopolitical instability, including financial shock, pandemic, climate change, changes in the regulatory environment, etc. ● internal factors such as poor stock selection, poor management of gearing, loss of key members of the fund management team, etc. The investment manager periodically reviews the investment objective and policy in line with best practice and taking account of investor appetites. The Board receives regular updates on professional and retail investor activity from the investment manager, and reports from the corporate broker, both of whom remain in contact with professional investors throughout the year, to inform themselves of investor sentiment and how the Company is perceived in the market. From time to time, research may be undertaken by a third-party consultant to specifically ascertain the views of retail investors. The level of discount and share register are reviewed by the Board at each meeting. The Board reviews compliance with the investment limits at each meeting. The Fund Manager maintains a diverse portfolio (sector, country, business life cycle) with buy/sell disciplines and employs suitable quantitative and qualitative metrics, which incorporates environmental, social and governance (‘ESG’) considerations, for assessing stocks for inclusion or held within the portfolio. The Board reviews the Key Performance Indicators (‘KPI’s), portfolio composition and levels of gearing at each meeting. TheBoard furthermore maintains an understanding of the fund management team’s investment process and considers the potential for climate change to impact the value of the portfolio, alongside other factors which may have the same effect. Operational Failure of, disruption to or inadequate service levels provided byprincipal third-party service providers leading to a loss of shareholder value or reputational damage. This includes cyber security risks which may compromise the integrity of data and the effective operation of third-party service providers. The Board engages reputable third-party service providers and formally evaluates their performance, and terms of engagement, at least annually. The Audit Committee assesses the effectiveness of internal controls in place at the Company’s key third-party service providers through review of their ISAE 3402 reports, quarterly internal control reports from the investment manager and monthly reporting on compliance with the investment limits established by the Board. Legal and regulatory Loss of investment trust status, breach of the Companies Act 2006, Listing Rules, Prospectus Regulation and/or Disclosure Guidance andTransparency Rules or the Alternative Fund Managers Directive and/or legal action brought against the Company and/or directors and/or the investment manager leading to a decrease in shareholdervalue and reputational damage. The Board engages reputable third-party service providers and formally evaluates their performance, and terms of appointment, at least annually. The Audit Committee assesses the effectiveness of internal controls in place at the Company’s key third-party service providers through review of their ISAE 3402 reports and, inrespect of the investment manager’s investment trust operations, reporting from the investment manager’s internal audit function. The investment manager’s Compliance function has reporting obligations under AIFMD, with any non-compliance being captured in the investment manager’s quarterly internal control reporting to the Board. Managing risks and our viability The European Smaller Companies Trust PLC Annual Report 2024 16 Managing risks and our viability (continued) Principal risk Mitigating measures Financial Market, liquidity and/or credit risk, inappropriate valuation ofassets or poor capital management leading to a loss of shareholder value. The Board determines the investment limits and monitors compliance with these at each meeting. The directors review the portfolio liquidity at each meeting and periodically consider the appropriateness of hedging the portfolio against currency risk. The Board reviews the portfolio valuation at each meeting and considers the effectiveness of controls in place at its principal third-party service providers, including the fund accountants, at least annually. Investment transactions are carried out by a large number of approved brokers whose credit standard is periodically reviewed and limits are set on the amount that may be due from any one broker, cash is only held with the custodian/ depositary or reputable banks. The Board monitors the broad structure of the Company’s capital including the need to buy back or allot ordinary shares and the extent to which revenue in excess of that which is required to be distributed, should be retained. Going concern and viability In keeping with provisions of the Code of Corporate Governance issued by the Association of Investment Companies (the ‘AIC Code’), the Board has assessed the prospects of the Company for a period of at least twelve months from the date of this report, being 9 October 2025 (our assessment of going concern) and also over the longer period of three years (our assessment of viability). We consider the Company’s viability over a three-year period as we believe this is a reasonable timeframe reflecting the longer term investment horizon for the portfolio, but acknowledges the inherent shorter term uncertainties inequity markets. As part of the assessment, we have considered the Company’s financial position, as well as its ability to liquidate the portfolio and meet expenses as they fall due. The following aspects formed part of our assessment: ● the closed-end nature of the Company which does not need to account for redemptions; ● an assessment of the principal and emerging risks, as well as the uncertainties facing the Company, including the potential impact of climate change on the value of investeecompanies; ● the diverse nature of the portfolio and its anticipated liquidity in normal and stressed market conditions; ● the level of the Company’s revenue reserves and the size of the bank overdraft facility; and ● the expenses incurred by the Company, which are predictable and modest in comparison with the assets and the fact that there are no capital commitments currently foreseen which would alter that position. Also of relevance in contemplating the duration of the Company, is the three-year cycle for its continuation vote. Shareholders were last asked at the annual general meeting in 2022 if they wished the Company to continue in operation. The resolution was passed with the overwhelming support of 84.4% shareholders who voted. The next continuation vote will be put to shareholders at the annual general meeting in 2025. Based on the voting record since 2000 for such resolutions, the Board is confident that shareholders will continue to support the Company. In the event this is not the case, the Company will be wound up in keeping with the provisions of the articles. As well as considering the principal risks and financial position of the Company, along with the continuation vote, the Board has made the following assumptions: ● investors will continue to wish to have exposure to investing in European small cap companies; ● investors will continue to invest in closed-end funds; ● the Company’s performance will continue to be satisfactory; and ● the Company will continue to have access to adequate capital when required. Based on the results of the assessment, we have concluded that: ● the Company has adequate resources to meets its liabilities for a period of at least twelve months from the date of this report, being 9 October 2025, meaning it is therefore appropriate to prepare these financial statements on a going concern basis; and ● we have a reasonable expectation that the Company will be able to continue operations over the coming three-year period, as well as meeting its expenses and liabilities for that period. The European Smaller Companies Trust PLC Annual Report 2024 17 Responsible investment We aim to make well-informed investment decisions which deliver the returns that our shareholders expect, but not at the expense of the environment or wellbeing of society. We believe that investing in well-managed, sustainable businesses is the foundation for achieving good returns. The closed-end nature of the Company makes it ideal for long-term investing and our focus on small, developing companies provides our fund management team with the opportunity to meaningfully engage with investee companies as they grow and develop their strategies. Investment process The fund management team employ a bottom-up stock selection approach in constructing the portfolio and continuously monitor the performance of and risks associated with each holding. The approach is designed to deliver the capital growth set out in the investment objective. The process involves screening potential investment opportunities, meeting with management teams to understand their businesses and supplementing this with internal and external research. Understanding the business, the threats to its success, its competitive position and quality of the management team in the context of the valuation of the company are key to determining whether an investment is made and also the size of the investment. Overview of the investment process Proactive idea generation Valuation is key Risk management Understand the business Screening Across the company life cycle… Question ourselves HOLT quantitative challenge Meeting Management External Research Internal Research Seek mispriced securities Monitoring and sell discipline Source: Janus Henderson Investors The Company does not pursue an environmental, social or governance (‘ESG’) strategy, but the fund management team integrates ESG elements into the investment process on all bottom-up stock decisions when material to the investment case. ESG metrics are applied in a non-binding manner. Thefund management team’s view is that companies scoring well on ESG and sustainability will warrant a valuation premium over time and they seek to determine what a fair premium for those assets should be and invest when stock can be bought at an attractive price. Negative screening isnot employed, but instead the fund management team looks to find companies that can improve. Defining ESG: ● Environmental factors include climate change, energy efficiency, resource depletion, water and waste management. ● Social factors include employee and community relations, diversity, quality of life, enhancements in knowledge and advances in supportive technology for improved sustainability. ● Governance factors include mitigating risks such as bribery and corruption, questioning board diversity, executive pay, accounting standards and shareholder rights, and positively influencing corporate behaviour. The European Smaller Companies Trust PLC Annual Report 2024 18 Responsible investment (continued) An assessment of ESG considerations is made for each stock during the research process when deemed material. The focus on the analysis is based on the rate of change rather than existing scores. It is therefore crucial to understand what procedures and initiatives a company is putting in place to improve ESG practices. In terms of governance, the fund management team specifically considers the track record and execution ability of management, as well as their attitudes towards public market investors and the allocation of capital. The governance and incentive structures which management operate are key elements in corporate value creation. This can be particularly important when looking at turnaround situations where management teams are often new to the business and their actions are integral to the investment thesis. Constructive and respectful attitudes to public market shareholders and the protection of minority interests are also very important. The responsiveness of a company towards shareholder concerns is a crucial signal about the ability to unlock value and distribute it to all of a company’s owners. Beyond the governance arrangements, our fund management team’s research looks at several other sources of quantitative and qualitative information. Environmental and social factors are an important part of that in combination with fundamental research into the cash generative potential of a business. Increasingly environmental and social factors are proving to be pivotal to the emergence of structural themes, such as electromobility or renewable energy, making them too important to ignore. ESG investment process Environmental damage Energy sourcing Carbon intensity Sustainability targets Environmental Social Workplace standards Scandals Diversity Societal needs Governance Shareholder alignment Management reputation Disclosures Capital allocation Do we trust them? Earnings quality Approximately 600 company meetings per annum Led by investment team and /or /with Governance and Responsible Investment team Focus on direction of travel Informs voting decisions Presents investment opportunities and risks Position sizing Informs buy/sell decisions Third party feedback We will hold a low scoring stock if we believe it will improve Portfolio implicationsEngagements Core assumptions ESG Analysis: What we look for Data integrity is poor, therefore engagement is key Focus on financial materiality 1 2 Insights Insights Source: Janus Henderson Investors Headline ratings from external providers may be a useful starting point, but do not offer a complete picture on a standalone basis. They are often backward looking with data integrity issues for smaller companies. External providers face significant difficulties in aligning subjective topics contained within the ESG arena with attempts at an objective scoring system used to compare stocks. As a result, there is often a high level of dispersion in ratings depending on the agency. Furthermore, certain issues within ESG can be in conflict, for instance many European smaller companies have excellent environmental and social benefits, which are balanced by governance concerns through issues such as high levels of family ownership. These, along with other factors, drive the fund management team’s focus upon improvements in ESG practices and disclosures, in addition to the existing status. Usually based on MSCI ESG Ratings The European Smaller Companies Trust PLC Annual Report 2024 19 Responsible investment (continued) Engagement with investee company Reason for engagement: Many small cap companies may still be in the process of developing their environmental, social and governance (‘ESG’) disclosures. As such they are more likely to be penalised in areas where specific disclosures have not been made, despite measuring up to these standards well in practice. Objective: To engage with a recently listed small, family owned business to better understand their ESG disclosures and MSCI rating. Outcome achieved: Dialogue with the company was established and they were able to outline how they had engaged with the index provider to more accurately reflect the company’s position in respect of ESG factors. Thecompany was further able to outline steps already taken and underway with a view to strengthening their ESG framework and disclosures. Follow up: The disclosures in the next annual report will be reviewed and dialogue with the company resumed. Voting We believe that voting at general meetings is an important aspect of corporate stewardship and a means of signalling shareholder views on board policy, practices and performance. We have tasked our investment manager with considering how best to vote the rights attached to the shares in the Company’s portfolio. This enables us to utilise the expertise of their Governance and Responsible Investment team in assessing engagement by investee companies and the appropriateness of any resolutions which shareholders may be asked to approve. The Board retains oversight of the process by receiving reporting at each meeting indicating how the Company’s shares have been voted and where support for management recommendations has not been warranted, and by reviewing our investment manager’s Responsible Investment Policy and Proxy Voting Policy and Procedures at least annually. Voting decisions are guided by the best interests of the investee companies’ shareholders and made in consultation with the fund management team, who have an in-depth understanding of the respective company’s operations. Thefund management team believe in engaging with management and boards to resolve issues of concern ratherthan to vote against shareholder meeting proposals. Thisapproach is more likely to be effective in influencing company behaviour. In the period under review, we voted at 97.9% of the general meetings held by investee companies. The only proposals not voted on are those which would have resulted in share- blocking. This is where voting would have restricted the ability to trade the shares in advance of the meeting. At 56.1% of the meetings at which we voted, at least one vote was cast against management recommendations. Voting record 88.8% of resolutions were supported 11.1% of resolutions were not supported 0.1% of resolutions were abstained from 88.8% 0.1% 11.1% Breakdown of resolutions not supported Auditor related Capital issuance or structure Amend articles Director compensation Director related (other than compensation) Other business* 6.1% 8.8% 2.3% 1.4% 39.1% 42.3% Source: Janus Henderson Investors using Institutional Shareholder Services (ISS) categories * We routinely vote against proposals labelled ‘other business’. Although this request allows the board and shareholders to raise other issues and discuss them at the meeting, it may lead to subsequent approval of items without prior disclosure to minority shareholders The environment As an investment trust, the Company’s own direct environmental impact is minimal. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. For the same reasons, the Company considers itself to be a low energy user under the Streamlined Energy & Carbon Reporting (‘SECR’) regulations and therefore is not required to disclose energy and carbon information. The European Smaller Companies Trust PLC Annual Report 2024 20 Responsible investment (continued) The investment manager recognises the importance of managing its operational activities in a sustainable way and minimising any adverse impact on the environment. In 2021 Janus Henderson Investors reached its three-year target to reduce its carbon footprint by 15% per full-time employee (‘FTE’) from 2018 levels. In 2022, using guidance from the Science-Based Target Initiative, Janus Henderson Investors set ambitious new five-year reduction targets versus a 2019 baseline and per FTE: ● reduction target of 29.4% in Scope 1 (fuel) and Scope 2 (electricity) emissions; ● reduction target of 17.5% in Scope 3 (business travel, freight, paper, water, waste) emissions; and ● reduction target of 17.5% on water and waste consumption by FTEs. In addition to this, the investment manager has maintained aCarbonNeutral ® certification since 2007 and offsets all its operational Scope 1, Scope 2 and Scope 3 emissions each year. Through this process, the investment manager has invested in a variety of offset projects around the world, delivering financial support to essential renewable energy, forestry and resource conservation projects that support reductions in greenhouse gas emissions. All projects supported have been classified as ‘additional’ by an independent third-party, meaning that they would not happen without the sale of carbon credits. Our appointed investment manager discloses its carbon emissions annually through regulatory and voluntary reporting frameworks, including SECR and the CDP (formerly the Carbon Disclosure Project), as well as in its 2023 Responsibility Report, which provide more information. The investment manager produces product-level Task Force on Climate-Related Financial Disclosures (‘TCFD’) reports. These reports include an overview of the climate-related governance, strategy, risk management, and metrics and targets of Janus Henderson Investors and its portfolios. Product-level metrics include absolute carbon emissions, carbon footprint, weighted average carbon intensity, implied temperature rise and climate scenario analysis (Climate Valueat Risk). The investment manager’s TCFD Report specific tothe Company is available on the Company’s website at www.europeansmallercompaniestrust.com. The European Smaller Companies Trust PLC Annual Report 2024 21 Measuring our performance In order to measure the success of the Company in meeting its investment objective and to evaluate the performance of the Fund Manager, the directors take into account a number of Key Performance Indicators (‘KPIs’). NAV and share price total return compared to the benchmark (rebased to 100) 1 year Jun 2023 Dec 2023 Jun 2024 Sep 2023 Mar 2024 £ Benchmark 2 Share Price 3, 4 NAV 1, 4 85 90 95 100 105 110 115 120 125 130 Key Performance Indicators NAV total return performance compared to the AIC 5 and open end sectors (rebased to 100) 1 year 85 90 95 100 105 110 115 120 Jun 2023 Dec 2023 Apr 2024 Jun 2024 Aug 2023 Oct 2023 Feb 2024 £ NAV 1, 4 AIC sector 5 IA European Smaller Companies 6 EAA Fund Europe Small-Cap Equity 7 Benchmark 2 Premium/discount 4 compared to the AIC sector average 1 year Company AIC sector 5 -18 -17 -16 -15 -14 -13 -12 -11 -10 Jun 2023 Dec 2023 Apr 2024 Jun 2024 Aug 2023 Oct 2023 Feb 2024 % 1 NAV total return assuming the reinvestment of all dividends 2 Euromoney Smaller European Companies (ex UK) Index up to 30 June 2022, MSCI Europe ex UK Small Cap Index thereafter 3 Share price total return using closing price 4 NAV total return, share price total return and the discount are regarded as Alternative Performance Measures. More information on these can be found on pages 78 and 79 The European Smaller Companies Trust PLC Annual Report 2024 22 5 The sector is the AIC European Smaller Companies sector 6 Investment Association sector 7 Morningstar category Key Performance Indicators (continued) Premium/discount compared to the AIC sector average 5 year Company AIC sector 5 Jun 2019 Jun 2020 Jun 2021 Jun 2022 Jun 2023 Jun 2024 % -20 -18 -16 -14 -12 -10 -8 -6 NAV total return performance compared to the AIC 5 and open end sectors (rebased to 100) 5 year Jun 2019 Jun 2020 Jun 2021 Jun 2022 Jun 2023 Jun 2024 % 60 80 100 120 140 160 180 200 NAV 1, 4 AIC sector 5 IA European Smaller Companies 6 EAA Fund Europe Small-Cap Equity 7 Benchmark 2 NAV and share price total return compared to the benchmark (rebased to 100) 5 year % 60 80 100 120 140 160 180 200 NAV 1, 4 Benchmark 2 Share price 3, 4 Jun 2019 Jun 2020 Jun 2021 Jun 2022 Jun 2023 Jun 2024 The European Smaller Companies Trust PLC Annual Report 2024 23 Granges, 0.6% of the portfolio Company specialising in rolled aluminium products for the manufacture of brazed heat products Governance 24 Christopher Casey Position: Chairman of the Board (from 25November 2019); formerly the Chairman of the Audit Committee (1March 2010 – 25 November 2019) Date of appointment: 1 March 2010 Career and background Christopher was a partner of KPMG LLP and its predecessor firms from 1992. He specialised in audit and transactions advisory services. He retired from KPMG LLP in February 2010 and has been a non-executive director of operating and investment companies in various jurisdictions since that time. Skills and expertise Christopher has extensive accounting, auditing, corporate governance and listed companies experience. External appointments He is a non-executive director and the Audit Committee Chairman of Mobius Investment Trust plc, CQS Natural Resources High Yield Trust plc and Life Settlement Assets PLC. Daniel (Dan) Burgess Position: Chairman of the Audit Committee Date of appointment: 25 November 2019 Career and background Dan was a partner at KPMG LLP for twenty-three years. He initially led the statutory audits of a number of large public limited companies and public interest entities before specialising in due diligence and regulatory services on mergers and acquisitions and capital market transactions. Skills and experience He has significant accounting, auditing, corporate governance and listed companies experience. External appointments Dan is the Chairman of the Audit Committee of JPMorgan Emerging Europe, Middle East and Africa Securities plc. Ann Grevelius Position: Independent non-executive director Date of appointment: 23 September 2019 Career and background Ann has more than thirty years´ experience in the asset management sector and has been active in the venture capital industry as partner and senior advisor at GP Bullhound, a technology advisory and investment firm. She has held positions as Chief Investment Officer and Global Head of Investment Strategy at SEB Wealth Management and prior to that, Ann was head of Swedish and Nordic Equities at SEB Investment Management and Handelsbanken Asset Management. Skills and experience Ann has extensive asset management experience and her input gives greater insight on market sentiment and conditions in continental Europe. External appointments She is Chairman and co-founder of Optise AB, a fintech start-up within digital asset management and holds a number of non-executive directorships including OX2 AB, a renewable energy company and Aktia Bank PLC, the Finnish asset manager, bank and life insurer. She is Chairman of the Investment Committee at the Swedish Foundation for Strategic Research. Board of Directors The right balance of skills and experience Christopher Casey Daniel (Dan) Burgess Ann Grevelius The European Smaller Companies Trust PLC Annual Report 2024 25 Simona Heidempergher Position: Senior Independent Director (from 29July 2021) and Chairman of the Nomination and Remuneration Committee (from 27 July 2022) Date of appointment: 1 September 2014 Career and background Simona is a Managing Director of Merifin Capital, a privately owned European investment company with offices in Europe, Asia and the USA, which has successfully invested in traditional and alternative asset classes for more than 30 years. Skills and experience Simona has a wealth of asset management experience and her knowledge of European markets provides useful context to the investment background. External appointments She is a Managing Director of Merifin Capital, chair of the board of directors of the Stramongate Group, a Luxembourg public company, and a director of Hansa Investment Company Limited which is listed on the London Stock Exchange. James Williams Position: Independent non-executive director Date of appointment: 1 November 2023 Career and background James has over 30 years’ international business experience, including nearly 20 years in the investment banking industry, having held senior roles in Asia and Europe at ING Barings, ABN AMRO and Commerzbank. Following his departure from Commerzbank, he became a partner at Saginaw Capital LLP until 2008. Skills and experience James has many years’ international business experience in Asia and Europe, and a strong knowledge of theinvestment trust sector and financialmarkets. External appointments James is the non-executive Chairman of Schroder AsiaPacific Fund plc and a non-executive director of Net Zero One Limited and NT Asian Discovery Fund. Board of Directors (continued) Simona Heidempergher James Williams The European Smaller Companies Trust PLC Annual Report 2024 26 Governance codes The Board is pleased to report to shareholders on how theCompany has applied the principles of the Code of Corporate Governance published by the Association of Investment Companies. By virtue of the Company’s listing on the London Stock Exchange, the Board is required to report on how the principles of the UK Corporate Governance Code (the ‘UKCode’) have been applied. Being an investment company, a number of the provisions of the UK Code are not applicable as the Company has no executive directors or internal operations. Consequently, the Board considers the principles and recommendations of the Code of Corporate Governance published by the Association of Investment Companies (the ‘AIC Code’). The AIC Code addresses the principles set out inthe UK Code as well as additional recommendations on issues that are of specific relevance to investment companies. The Company has reported against provisions of the AIC Code published in 2019, which the Financial Reporting Council has endorsed. A new UK Code was published in January 2024, with an updated AIC Code published in August 2024. The new Codes will be applicable to financial years beginning on or after 1 January 2025. Copies of the AIC Code and the UK Code can be found on the respective organisations’ websites: www.theaic.co.uk and www.frc.org.uk. Statement of compliance The Board has considered the principles of the AIC Code andconfirms that it has complied with these throughout the reporting period. The Company has no executive directors so does not consider executive remuneration. As a fully managed investment company, the Company has no internal operations so does notmaintain an internal audit function, although the Audit Committee regularly considers the need for it. Overview The Board is comprised entirely of non-executive directors and has constituted three principal committees: the Audit Committee, the Management Engagement Committee and the Nomination and Remuneration Committee. The Board has also constituted an Insider Committee which meets when required to assist the Board in discharging its responsibilities under the Market Abuse Regulations. The terms of reference for each Committee are kept under regular review by the Board and are available on the Company’s website www.europeansmallercompaniestrust.com. The Board engages third-party service providers to deliver theoperations of the Company. Janus Henderson Investors has been appointed to manage the investment portfolio and is the Company’s Alternative Investment Fund Manager. The investment manager also provides the day-to-day accounting, company secretarial, administrative, sales and marketing activities. TheCompany has appointed a depositary, which in turn appoints the custodian and is responsible for the safe custody of the Company’s assets. The Company has appointed a registrar to maintain the Register of Members andassist shareholders with queries in respect of their holdings. The Company entered into each of these principal engagements after full and proper consideration of the quality and cost of the services offered, including the operation of their internal control environments. The Board and its committees maintain oversight of third-party service providers through regular and ad hoc reporting, as well as ongoing monitoring by the investment manager. Board leadership and purpose The Board is responsible for providing leadership and setting the tone from the top in terms of the Company’s culture and values. The Board appoints all third-party service providers and monitors their performance throughout the year. The directors formally evaluate the quality of the service provided by each third-party service provider and consider the appropriateness of the terms of their engagement at least annually. The Board aligns the Company’s risk appetite withthe investment objective set by shareholders and establishes investment restrictions accordingly. The Board keeps under regular review the risks faced by the Company and assesses the effectiveness of internal controls put in place to mitigate these. As well as making the strategic decisions regarding the Company’s objectives and establishing and monitoring the risk management framework, the Board’s purpose is to provide independent oversight of the operations delivered by the Company’s third-party service providers and to challenge the decisions and recommendations made by them, particularly the investment manager. The Board does this by meeting formally at least five times a year, with additional Board or committee meetings arranged when required. The directors have regular contact with the Fund Manager and other employees of the investment manager in connection with the delivery of company secretarial, sales, marketing and other administrative services. The Board has a formal schedule of matters specifically reserved for its decision, which includes setting strategy and providing oversight of performance against agreed measures. It approves any changes to the structure and capital arrangements for the Company, has oversight of financial reporting and assesses the effectiveness of the internal control framework. The Board approves communications with shareholders, the appointment of new directors and oversees corporate governance matters. Corporate Governance Report The European Smaller Companies Trust PLC Annual Report 2024 27 Each meeting follows an agenda agreed with the Chairman and includes a review of the Company’s investment performance, financial position, compliance with the investment parameters and a review of notable changes to the share register, along with any sales and marketing activities undertaken. This reporting enables the Board to ensure that control is maintained over the Company’s affairs. The investment manager ensures that the directors receive relevant management, regulatory and financial information. Employees of the investment manager attend each Board meeting enabling the directors to probe further on matters ofconcern. The Chairman is able to attend meetings of all the chairmen oftheinvestment companies managed by JHI which provides a forum to discuss industry matters. The directors have access to the advice and services of the Corporate Secretary through its designated representative who is responsible for ensuring that Board and committee procedures are followed. The proceedings of all Board and committee meetings are minuted, with any particular concerns raised by the directors appropriately recorded. TheBoard and the investment manager operate ina supportive, co-operative and open environment. The Company has a procedure for directors to take independent professional advice at the expense of the Company in the furtherance of their duties. In order to enable them to discharge their responsibilities, all directors have fulland timely access to relevant information. Division of responsibilities Role Primary responsibilities Shareholders/ investors The Company’s shareholders are responsible for: ● approving the Company’s investment objective and policy; ● making decisions regarding changes to the Company’s constitution; ● electing and re-electing directors to the Board, or removing them from office if deemed appropriate; and ● determining the overall limit for directors’ remuneration. Chairman The Chairman of the Board is responsible for: ● leading and managing Board business and ensuring the timely flow of information from service providers to the Board. He facilitates open, honest and constructive debate among directors; ● leading the Board in developing succession planning; ● leading the Board in determining its governance framework, culture and values; ● representing the Company, alongside the Fund Manager, externally at business, and community level; and ● managing the relationship with the investment manager. Senior Independent Director The senior independent director: ● acts as a sounding board to the Chairman; ● serves as an intermediary for the other directors and shareholders; and ● is responsible for leading the performance evaluation of the Chairman. Independent non- executive directors The independent non-executive directors are responsible for: ● providing constructive and effective challenge, especially to the decisions of the investment manager; ● scrutinising and holding to account the performance of the – fund management team in meeting the investment objective; – investment manager in the promotion of the Company and day-to-day smooth operations of the Company’s business; and ● providing strategic guidance and offering specialist advice. Corporate Governance Report (continued) The European Smaller Companies Trust PLC Annual Report 2024 28 Role Primary responsibilities Committee chairs The Committee chairs are responsible for: ● the leadership and governance of their committee; ● maintaining the relationships with specialist service providers delivering services within the remit of their committees; ● reporting on the activities of their committee to the Board; and ● seeking approval from the Board for the responsibilities set out in their respective terms of reference. Investment manager The investment manager is the Company’s appointed Alternative Investment Fund Manager and is responsible for: ● promoting the Company’s investment proposition to professional and retail investors; ● making the necessary reporting to the FCA regarding the Company’s status as an Alternative Investment Fund; ● providing accounting, company secretarial and other administrative services to the Company ensuring compliance with the applicable statutory and regulatory provisions; and ● coordinating the delivery of services provided by the Company’s other third-party service providers. Fund Manager The Fund Manager and his team are responsible for: ● selecting the stocks held within the portfolio; ● diversification and risk management through stock selection and size of investment; ● determining the volume and timing of acquisitions and disposals; and ● determining the frequency and level of gearing within the overall limits set by the Board. Board composition At the date of this report, the Board comprises five non-executive directors. Their background and business experience is set out on pages 25 and 26. Appointment, tenure and retirement of directors The Board may appoint directors at any time during theyear. Any director so appointed stands for election byshareholders atthe next annual general meeting. Directors are generally expected to serve two terms of threeyears, which may be extended to a third term, and occasionally beyond, atthe discretion of the Board and subject to satisfactory performance evaluation and annual re-electionby shareholders. All directors stand for re-election by shareholders annually inkeeping with the provisions of the AIC Code. The articles permit shareholders to remove a director before the end of their term by passing an ordinary resolution at a general meeting. An appointment may be terminated by either party giving written notice without compensation payable. Chairman’s tenure Given the entirely non-executive nature of the Board and the fact that the Chairman may not be appointed as such at the time of their initial appointment as a director, the Chairman’s tenure may be longer where this is considered by the Board to be in the best interests of the Company. As with all directors, the continuing appointment of the Chairman is subject to satisfactory performance evaluation, annual re-election by shareholders and may be further subject to the particular circumstances of the Company at the time they intend to retire from the Board. The directors are cognisant of the benefits of regularly refreshing Board membership and seek to do so while retaining a balance of knowledge of the Company and the relationship with the investment manager. Directors’ independence The independence of the directors is determined with reference to the AIC Code and is reviewed by the Nominationand Remuneration Committee at least annually. The Committee considers each of the director’s other commitments, as well as their tenure and any connections they may have with the investment manager or other key service providers. Following completion of the evaluation inJuly 2024 the Committee concluded that all directors continued to be independent in character and judgement. Simona Heidempergher will have been a director for over nine years by the time of the annual general meeting in 2024. Theother directors consider that she is, and has been, independent since her appointment. Independence stems from the ability to make decisions that conflict with the interest of the investment manager and this is a function of confidence, integrity and judgement. The Board is firmly of the view that length of service does not impair a director’s ability to act independently, but that the longer perspective adds value to the deliberations of the Board, especially in light of the Company’s business model and the entirely non-executive nature of the Board. Corporate Governance Report (continued) The European Smaller Companies Trust PLC Annual Report 2024 29 Diversity The Board supports the principle of boardroom diversity, ofwhich gender and ethnicity are two aspects. A third, important aspect given the Company’s objective, is the presence of Europe-based directors on the Bo

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